IMPORTANT GUIDELINES ON PRUDENTIAL NORMS ON INCOME RECOGNITION, ASSET CLASSIFICATION* 1.

DEFINITION Out of orderstatus An out of order account is one in which the outstanding balance remains continuously in excess of the sanctioned limit/drawing power or the outstanding balance is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance heet or credits are not enough to co!er the interest debited during the same period" O!erdue O!erdue is the unpaid amount due to the ban# under any credit facility on due date" $on%performing Assets An asset &including a leased asset' ceases to generate income is treated as non performing asset &$(A'" A )oan or an ad!ance is classified as $(A as under*% $ature of +acility ,erm )oan (arameters

-nterest and/or instalment of principal remain o!erdue beyond 90 days O!erdraft/.ash .redit /emains out of order as indicated abo!e Bill (urchased/discounted /emains o!erdue beyond 90 days .rop )oans &short duration -nstalment of principal or interest crops' thereon remains o!erdue for 0 crop seasons .rop )oans &)ong duration -nstalment of principal or interest crops' thereon remains o!erdue for 1 crop season ecuriti2ation transactions Amount of li3uidity facility remains outstanding beyond 90 days 4eri!ati!e transactions O!erdue recei!ables representing positi!e mar#%to%mar#et !alue of a deri!ati!e contract which remains unpaid beyond 90 days from specified due date for payment Ban#s are re3uired to classify an account as $(A wherein the interest due and charged during any 3uarter is not ser!iced fully within 90 days from the end of the 3uarter"

2. INCOME RECOGNITION -ncome from $(A assets is to be recogni2ed only when it is actually recei!ed" 5owe!er, interest on ad!ances against term deposits, $ ., -6(s, 76(s, and )ife policies may be ta#en into income account on the due date pro!ided ade3uate margin is a!ailable in the accounts" On an account &incl" bills purchased and discounted and 8o!ernment guaranteed accounts' turning $(A, ban#s should re!erse the interest already charged and not collected by debiting (rofit and )oss account, and stop further application of interest" )i#ewise fees, commission and similar income in respect of past periods, if uncollected, need to be re!ersed" -nterest reali2ed on $(As may be ta#en to income account pro!ided the credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned" Ban#s may continue to record such accrued interest, but not reali2ed, in a 9emorandum account in their boo#s which should not be ta#en into account for computing 8ross Ad!ances,

3. ASSET CLASSIFICATION $(As are being classified, based on the period for which the asset has remained non%performing and realisability of the dues, into three categories as under*% $o" 01" .ategory ubstandard Assets (arameters : /emained $(A for a period not less than or e3ual to1 year" :-n such cases, the current net worth of the borrower/guarantor or mar#et !alue of the security charged is not enough to ensure reco!ery of the ban#s dues; * Likely to sustain some loss if deficiencies are not corrected" :/emained in substandard category beyond 1 year; :/eco!ery % highly 3uestionable and improbable" 0<" )oss Assets :Asset considered uncollectible and of little !alue but not written off wholly by the ban#"

00"

4oubtful Assets

:.ontinuance as ban#able assets although it may ha!e some sal!age or reco!ery !alue" <"18uidelines for .lassification $(A classification should be done ta#ing into account the degree of credit wea#nesses and a!ailability of collateral security for reali2ation of dues" Ban#s should a!oid the tendency to delay or postpone identification of $(As especially in respect of high !alue accounts; A!ailability of security/net worth of the borrower/guarantor should not be ta#en into account while identifying the $(A; Ban#s should not classify an ad!ance account as $(A merely due to existence of some temporary aberration/deficiency such non%a!ailability of ade3uate 4rawing (ower based on latest stoc# statement, o!er limit, non%submission of stoc# statement, renewal of account, etc" A wor#ing capital account would become $(A, if the irregularity continues beyond 90 days e!en though the unit would be wor#ing and its financial position is satisfactory" /egular and ad hoc limits are re3uired to re!iewed/regulari2ed within 1=0 days from the due date/date of sanction; else, it is to be classified as $(A" A $(A )oan account, other than restructured and rescheduled, can be upgraded to standard assets upon payment of arrears of interest and principal is paid" Asset classification should be on borrower%wise and not facility wise" -n case one facility/in!estment of the borrower causes problem, all the facilities granted to the borrower are to be treated as $(A" Bills discounted facility under ). fa!ouring a borrower need not be classified as $(A in case any other facility is $(A" 5owe!er, in case of non%payment of bills under the ). on due date by the ). issuing ban# and the borrower fails to ma#e good the amount immediately, the outstanding under the Bills discounted is also to be classified as $(A" Asset classification of accounts under consortium arrangement is to be based on the record of reco!ery of the member ban#s" -n account where there is potential threat of reco!ery on account of erosion in !alue of security&>0?/10? of !alue assessed earlier or outstanding', non% a!ailability of security, existence of other factors such as frauds committed by borrowers, etc" such asset should straightaway be classified as doubtful or loss asset as appropriate* +inance granted to (A. /+ under the on%lending system, only that particular portion of credit in default to be classified as $(A" Ad!ances against paper securities such as ,4/s, $ .s eligible for surrender, -6(s, 76(s and life policies need not be treated as $(As, pro!ided ade3uate margin is a!ailable in the accounts" )oan with moratorium for payment of interest, the amount of interest would become o!erdue after the due date for payment of interest, if uncollected"

-n staff housing loan or similar other accounts where the interest is to be reco!ered after repayment of principal, such accounts would become $(A only when there is default in repayment of principal or interest on respecti!e due dates" Ad!ances bac#ed by guarantee of .entral 8o!ernment though o!erdue may be treated as $(A only when the 8o!ernment repudiates its guarantee when in!o#ed" 5owe!er, tate 8o!ernment guaranteed ad!ances and in!estments in tate 8o!ernment guaranteed securities would attract asset classification and pro!isioning norms if interest and/or principal or any other amount due to the ban# remains o!erdue for more than 90 days"

(ro@ects under implementation &.lassification of $(A' (ro@ect )oans are classified into 0 categories !i2" (ro@ect )oans for infrastructure sector and (ro@ect )oans for non%infrastructure sector" An infrastructure pro@ect loan would be classified as $(A before the date of commencement of commercial operations &4..O' as per record of reco!ery &90 days' unless it is restructured and eligible for classification as standard asset"

An infrastructure pro@ect would be classified as $(A if it fails to commence commercial operations within 0 years from the original 4..O" -f a pro@ect loan classified as standard asset is restructured any time during the period up to two years from the original date of 4..O, it can be retained as a standard asset if the fresh 4..O is fixed and the account continues to be ser!iced as per the restructured terms sub@ect to the application for restructuring should be recei!ed before the expiry of period of two years from the original 4..O and when the account is still standard as per record of reco!ery" 4elay in infrastructure pro@ects in!ol!ing court cases and pro@ects in other than court cases, extension of 4..O up to another 0 years &beyond the existing extended period of 0 years i"e" total extension of A years' and up to another 1 year &beyond the existing extended period of 0 years i"e" total extension of < years' respecti!ely is considered for treating them as $(A" A loan for a non%infrastructure pro@ect will be classified as $(A during any time before commencement of commercial operations as per record of reco!ery &90 days o!erdue'" -f the non%infrastructure pro@ect fails to commence commercial operations within B months from the original 4..O, it is to be treated as $(A, etc" ,a#e out +inance Cnder ,a#e out +inance, possibility of default, in !iew of the time%lag in!ol!ed in ta#ing%o!er, cannot be ruled out" ,he norms of asset classification will ha!e to be followed by the concerned lending ban#/financial institution and they should not recogni2e income on accrual basis, but only on actual receipt" Ban#/+should also ma#e suitable pro!ision pending the ta#eo!er by other institution" Cpon ta#eo!er of the account, the pro!ision could be re!ersed" But the ta#ing

o!er institution is re3uired to ma#e pro!ision in its boo#s treating it as $(A from the actual date of becoming $(A e!en though the account was not in its boo#s as on that date" (ost%shipment upplierDs .redit (ost shipment uppliers .redit under the EF-9 Ban# 8uarantee%cum%refinance programme, the extent payment has been recei!ed from the EF-9 Ban#, may not be treated as a non%performing asset for asset classification and pro!isioning purposes" Export (ro@ect +inance -n the e!ent of the export proceeds in respect of export pro@ect finance is held up due to political de!elopments in the importers country, the asset classification may be made after a period of one year from the date the amount was deposited by the importer in the ban# abroad"

Ad!ances under rehabilitation appro!ed by B-+// ,) -n case of a unit under rehabilitation pac#age appro!ed by B-+//,erm )ending -nstitution, the existing credit facilities continue to be classified as substandard or doubtful as the case may be" Asset classification norms would be applicable in respect of additional facilities sanctioned under the pac#age after a period of one year from the date of disbursement" 0A "PROVISIONING NORMS -n conformity with the prudential norms, and on the basis of classification of assets, etc" ban#s are re3uired to ma#e pro!isions on funded outstanding on global loan portfolio basis as under*% $o " 01" .ategory tandard Assets ector :Agriculture G 9Es :.ommercial /eal Estate &./E' :5ousing )oans at teaser rates and restructured ad!ances (ro!ision re3uirement :0"0>? of funded outstanding :1"00? of funded Outstanding :0"00? during teaser rate period and 0"A0? after 1 year of rate reset" :+or restructured

00"

ubstandard Assets

:All sectors

:Cnsecured Ad!ances

0<" 4oubtful Assets

:All sectors

:.o!ered by E.8.

0A" )oss Assets

All sectors

ad!ances 0"00? for first 0 years from date of restructuring" :$(A restructured account H0"00? in the first > years from the date of upgradation" :1>?of utstanding without ma#ing any allowance for E.8. and security a!ailable" :Additional 10? i"e" total 0>? and for infrastructure loans G total 00? pro!ided Escrow mechanism is a!ailable" : ecured portion 0>/A0/100? upto 1year/1%< years/more than < years respecti!ely" :Cnsecured portion I 100? :$et of E.8. guaranteed G reali2able !alue of security at the abo!e rates" ,o be written off or 100? of the outstanding"

(ro!isioning .o!erage /atio &(./' is essentially the ratio of pro!isioning to gross non%performing assets and indicates the extent of funds a ban# has #ept

aside to co!er loan losses" Ban#s are re3uired to maintain their total pro!isioning co!erage ratio, including floating pro!isions, at not less than J0? by eptember 0010" 05.SALE OF FINANCIAL ASSETS TO SC/RC Cnder the A/+AE - Act 0000, ban#s/+-s are permitted to sell financial assets to ecuriti2ation .ompanies & .' and /econstruction .ompanies &/.'" A financial asset which can be sold to the .//. by any ban#/ +- is*%

a) A $(A, including a non%performing bond/ debenture, and b) A tandard Asset where* i) ,he asset is under consortium/multiple ban#ing arrangements; ii) At least J>? of !alue of the asset is classified as $(A in the boo#s of other ban#s/+-s; and iii) At least J>? &by !alue' of the ban#s/+-s who are under the consortium/multiple ban#ing arrangements agree to the sale of the asset to .//." ,he prudential guidelines ha!e been grouped under !arious heads as under*% a) +inancial assets which can be sold" b) (rocedure for sale of ban#s/ +-s financial assets to !aluation and pricing aspects" ./ /., including

c) (rudential norms, in the following areas, for ban#s/ +-s for sale of their financial assets to ./ /. and for in!esting in bonds/debentures/ security receipts and any other securities offered by the .//. as compensation conse3uent upon sale of financial assets* i) (ro!isioning / 6aluation norms ii) .apital ade3uacy norms iii) Exposure norms d) 4isclosure re3uirements ,he guidelines, prudential norms, procedure for sale, disclosure re3uirements, etc" are detailed in the /B- 9aster .ircular dt" 01"0J"0011" Ban#s/+-s in!estment in .//. in debentures/bonds/security receipts/(,.s issued by .//. will constitute exposure on the .//." As only a few .//. are being set up now, ban#s/ +-s will be allowed, in the initial years, to exceed prudential exposure ceiling on a case%to%case basis"

6. PURCHASE & SALE OF NPAs 8uidelines ha!e been framed for underta#ing purchase and sale of $(As without in!ol!ing .//., as an option a!ailable, to de!elop a healthy

secondary mar#et for $(As" ,he option would be conducted within the financial system and has to be initiated with due diligence and care" ,he guidelines are applicable to ban#s, +-s and $B+.s purchasing/ selling non performing financial assets, from/ to other ban#s/+-s/$B+.s &excluding .s//.s'" A financial asset, including assets under multiple/consortium ban#ing arrangements, would be eligible for purchase/sale in terms of the guidelines if it is a $(A/$(- in the boo#s of the selling ban#" ,he guidelines ha!e been grouped under the following headings*

a) (rocedure for purchase/ sale of non performing financial assets by ban#s, including !aluation and pricing aspects" b) (rudential norms, in the following areas, for ban#s for purchase/ sale of non performing financial assets* i' ii' iii' i!' iv) Asset classification norms (ro!isioning norms Accounting of reco!eries .apital ade3uacy norms Exposure norms

c) 4isclosure re3uirements ,he guidelines, procedure, prudential norms, exposure norms, disclosure re3uirements, etc" are detailed in the /B- 9aster .ircular dt" 01"0J"0011" 7. WRITE OFF OF NPAs -n terms of ection A<&4' of the -ncome ,ax Act 19B1, interest income of $(As shall be chargeable to tax in the pre!ious year in which it is credited to the ban#s profit and loss account or recei!ed, whiche!er is earlier" Ban#s may either ma#e full pro!ision as per the guidelines or write off such ad!ances or claim such tax benefits as are applicable" /eco!eries made in such accounts should be offered for tax purposes as per the rules"

8. PRUDENTIAL GUIDELINES ON RESTRUCTURING OF ADVANCES A restructured account is one where the ban# grants concessions, which would not otherwise consider, ta#ing into account the borrowers financial difficulty" /estructuring in!ol!es modification of terms of ad!ance/securities, which would generally include, among others, alteration of repayment period / repayable amount/ the amount of instalments / rate of interest, etc" pecified (eriod means a period of one year from the date when the first payment of interest or instalment of principal falls due under the terms of restructuring pac#age"

,he guidelines on restructuring issued by /B- are grouped in four categories as under*% i) /estructuring of ad!ances extended to industrial units"

ii) /estructuring of ad!ances extended to industrial units under the .orporate 4ebt /estructuring &.4/' 9echanism iii) /estructuring of ad!ances extended to mall and 9edium Enterprises & 9E' iv) /estructuring of all other ad!ances" Eligibility Accounts classified under tandard, ubstandard and doubtful categories" Ban#s cannot reschedule / restructure / renegotiate borrowal accounts with retrospecti!e effect" Khile a restructuring proposal is under consideration, the usual asset classification norms would continue to apply" $o account is ta#en up for restructuring by the ban#s unless the financial !iability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring pac#age" Borrowers indulged in frauds and malfeasance is ineligible for restructuring" B-+/ cases are not eligible for restructuring without their express appro!al" .4/ .ore 8roup in the case of ad!ances restructured under .4/ 9echanism / the lead ban# in the case of 9E 4ebt /estructuring 9echanism and the indi!idual ban#s in other cases, may consider the proposals for restructuring in such cases, after ensuring that all the formalities in see#ing the appro!al from B-+/ are completed before implementing the pac#age"

Asset classification norms /estructuring of ad!ances could ta#e place in the following stages* &a' Before commencement of commercial production / operation; &b' After commencement of commercial production / operation but before the asset has been classified as Dsub%standardD; &c' After commencement of commercial production / operation and the asset has been classified as Dsub%standardD or DdoubtfulD" Cpon restructuring*% D tandard assetsD should be reclassified as Dsub%standard assetsD

$(As would continue asset classification as prior to restructuring and may slip into further lower asset classification categories with reference to the pre% restructuring repayment schedule" All $(A accounts would be eligible for being reclassified as standard category after obser!ation of satisfactory performance during the specified period" ,hereafter, the account would be go!erned as per the existing prudential norms with reference to repayment schedule" Additional finance considered may be treated as standard asset during the specified period" Any -nterest income should be recogni2ed only on cash basis in respect of accounts classified as substandard or doubtful at pre%restructuring stage" A restructured standard asset is sub@ected to restructuring on a subse3uent occasion; it should be classified as substandard" imilarly, a sub%standard or a doubtful restructured asset which is sub@ected to restructuring on a subse3uent occasion, its asset classification will be rec#oned from the date when it became $(A on the first occasion" -nterest income in respect of restructured standard asset can be recogni2ed on accrual basis -n case part of the outstanding principal amount is con!erted into debt or e3uity instruments as per the restructuring pac#age, the asset so created will be classified in the same asset classification category in which the restructured ad!ance has been classified" ,he +-,) / debt or e3uity instrument created by con!ersion of unpaid interest will be classified in the same asset classification category in which the restructured ad!ance has been classified"

Ban#s will hold pro!ision in respect of restructured assets as per existing pro!isioning norms Asset classification benefits are a!ailable to ban#s sub@ect to*% ,he dues of the ban#s are fully secured except - borrowers where the outstanding is upto /s"0> )a#h -nfrastructure pro@ects pro!ided the cash flows generated from these pro@ects are ade3uate for repayment of the ad!ance, escrow mechanism for the cash flows a!ailable, and ban#s ha!e a clear and legal first claim on these cash flows" ,he unit becomes !iable in 10 years, if it is engaged in infrastructure acti!ities, and in J years in the case of other units" ,he repayment period of the restructured ad!ance including the moratorium, if any, does not exceed 1> years in the case of infrastructure ad!ances and 10 years in the case of other ad!ances other than restructured home loans" (romotersD sacrifice &contribution' and additional funds brought by them should be a minimum of 1>? of ban#sD sacrifice upfront" 5owe!er, if the ban#s are con!inced that the promoters face genuine difficulty in bringing the share of

sacrifice immediately, the promoters could be allowed to bring in >0? of their sacrifice i"e" >0? of 1>? upfront and the balance within a period of one year" OBLE.,-6E O+ /E ,/C.,C/-$8 -t may be obser!ed that the basic ob@ecti!e of restructuring is to preser!e economic !alue of units and not e!er greening of problem accounts" ,his can be achie!ed by ban#s and the borrowers only by careful assessment of the !iability, 3uic# detection of wea#nesses in accounts and a time%bound implementation of restructuring pac#ages" ,he entire .orporate 4ebt /estructuring &.4/' 9echanism and /estructuring 9echanism are detailed in /B- 9aster .ircular" 9E 4ebt

9. AGRICULTURAL DEBT WAIVER AND DEBT RELIEF SCHEME 2008 ADWDRS! ,he guidelines pertaining to -ncome /ecognition, Asset .lassification and (ro!isioning, and .apital Ade3uacy as applicable to the loans co!ered by the debt wai!er and debt relief scheme for farmers are as under*% N"#$s %"# &''"()*s ()+,# D,-* W&./,# ,he small and marginal farmers eligible for debt wai!er, the eligible amount for wai!er may be transferred by the ban#s to a separate account named MAmount recei!able from 8o!ernment of -ndia under Agricultural 4ebt Kai!er cheme 000=M and the balance amount be as a MperformingM asset" $o pro!ision for standard assets as per current norms is re3uired to be made in respect of the balance amount, etc" N"#$s %"# &''"()*s ()+,# D,-* R,0.,% Cnder the scheme, the DotherD farmers, are gi!en a rebate of 0>? of the Meligible amountM, by the 8o!ernment by credit to his account and the balance &J>?' is to be paid by the farmer in three instalments as detailed in the scheme &since extended upto <0"0B"0010' Cpon payment of the entire share of J>?, ban#s may open an account for 4ebt /elief cheme, similar to the one opened for the recei!ables from 8Ounder the 4ebt Kai!er cheme, and bearing the nomenclature MAmount recei!able from 8o!ernment of -ndia under Agricultural 4ebt /elief cheme 000=M"

Asset .lassification +armers co!ered under 4ebt /elief cheme and gi!en underta#ing to pay their share under One ,ime ettlement cheme, the rele!ant amount can be treated

as MstandardM / MperformingM pro!ided ade3uate pro!ision is made by the ban#s and the farmers pay their share of settlement with one month of the due dates" (ro!isioning Accounts under 4ebt /elief cheme are classified as standard assets and attract the prudential pro!isioning as applicable to such assets" -n case default/delay in ma#ing their share under O, by farmers by the due dates &within one month', the outstanding amount in the rele!ant accounts shall be treated as $(A with reference to the original date of $(A and pro!isioning is to be made as applicable, etc"

.apital Ade3uacy Amount outstanding under Amount recei!able from 8O- attract 2ero ris# weight for the purpose of capital ade3uacy norms and amount outstanding in the accounts co!ered under the cheme is to be treated as a claim on the borrowers and ris# weighted as per extant norms" 8rant of +resh )oans to the Borrowers co!ered under the A4K4/ A small or marginal farmer is eligible for fresh agricultural loans upon the eligible amount being wai!ed and the fresh loan may be treated as Mperforming assetM, regardless of the asset classification of the loan sub@ected to the 4ebt Kai!er" imilarly fresh short%term production loans and in!estment loans to Mother farmersM may be treated as Mperforming assetsM, regardless of the asset classification of the loan sub@ected to the 4ebt /elief, and its subse3uent asset classification should be go!erned by the extant -/A. norms"

& OC/.E * /B- 9A ,E/ .-/.C)A/'